Michael Bacerott was thinking of heading to Shake Shack for lunch on Wednesday. Instead, he decided to go to McDonald’s on Lake and LaSalle streets for one simple reason: it’s cheaper.
Bacerott, who lives in South Hammond, Indiana, and works as a clerk in the Loop, began making adjustments to his dining routine. When he goes to work these days, he is more likely to bring his lunch from home.
“If I go out, I go out to cheaper restaurants, like McDonald’s and the like,” said Bacerott, who has three children, one of whom is 11 months old.
“Life isn’t as comfortable as it used to be,” he says.
In recent months, Chicagoans have had to contend with soaring food prices as inflation hit 40-year highs. To fight inflation, the Federal Reserve has raised interest rates four times since March. Interest rate hikes are the only tool the Fed has to curb inflation, but it cuts access to credit, raising fears of a possible recession, although experts have said the economy is not wasn’t there yet.
Some relief from high inflation came in July, when the consumer price index rose 8.5% from the same month last year, down from a 9.1% year-on-year increase. on the other in June, according to the Bureau of Labor Statistics. Gasoline and airline ticket prices fell, but food and rent prices continued to rise. The cost of food eaten outside the home, including in restaurants, rose 7.6% from July last year.
People like Bacerott are responding to high prices by trading down: swapping their Shake Shack lunch for McDonald’s, swapping sit-down meals for fast, casual meals at Chipotle or Panera, or simply eating at home more often. When they go out to eat, they sometimes choose less expensive dishes from the menu.
Doug Collins, 28, said on his way to McDonald’s on Wednesday that a year ago he probably would have sat down to lunch in the Loop. These days, he tries to eat out less often and chooses cheaper restaurants when he does.
Collins, who lives in Wicker Park and works in sales, said he noticed even his McDonald’s double cheeseburger was getting more expensive. It costs him about $2.99 now, which he says is about a dollar more than a year ago. “It’s like everything is a little more expensive now,” Collins said.
Over the past three months, 57% of people surveyed by Chicago-based food industry market research firm Datassential said they would cut back on restaurant spending due to inflation and the price increase. Fifty-six percent said they visited sit-down restaurants less often; half said they were reducing visits to fast food outlets.
People with household incomes below $45,000 and who have children cut restaurant spending the most, said David Portalatin, senior vice president and food industry adviser for the NPD Group. In the second quarter, consumers in this group visited restaurants nearly two dozen fewer times than in the same quarter last year, he said.
Meanwhile, people who earn more than $45,000 and don’t have children increased their restaurant visits slightly, adding three more visits on average. “It really hits families with kids,” Portalatin said.
Chief Financial Officer of McDonald’s Kevin Ozan said on an earnings call in late July that the Chicago-based burger chain noticed consumers were selling less. In particular, Ozan said, lower-income consumers chose value offerings more often and ate fewer combo meals.
Yum! Brands, which owns fast-food brands such as Taco Bell, Kentucky Fried Chicken and Pizza Hut, has also seen lower-income consumers pull back, CEO David Gibbs said on an Aug. 3 earnings call. So does Shake Shack, according to chief financial officer Katherine Fogerty.
Food industry executives tried to assure investors that certain aspects of their business would shield them from the worst effects of inflation.
After pointing out that he started in the business during the Great Recession, Domino CEO Russell Weiner suggested a potential benefit from the exchanges. “It’s a category where for people who want to continue eating out when times are tough, maybe they’ll switch from a sit-down or whatever to pizza,” he said. he told investors last month.
“The low-income consumer has definitely reduced their frequency of purchases. Luckily for Chipotle, that’s not the majority of our customers,” CEO Brian Niccol said during an earnings call on July 26. Niccol told investors that high-income consumers have increased their visits to Chipotle restaurants, potentially down from more expensive places.
Mark Brandau, group manager at Datassential, said Niccol was probably right – but laid-back companies like Chipotle, which planned to raise prices by 4% this month to help offset rising dairy costs, tortillas, packaging and labor, are not immune to consumer sticker shock.
“They’re not without risk that some of their customers will turn to a fast food restaurant,” Brandau said. “Like how fast food executives aren’t immune to that either, and they can lose some customers at a convenience store or just not go out at all.”
Food companies and restaurateurs are trying to strike a delicate balance: they need to raise prices because their costs are rising, but they don’t want to raise them so high that they begin to alienate customers. At quick-service restaurants, menu items increased by about 7% on average, Portalatin said.
“When you raise your price, customers don’t eat more,” said Guy Hollis, who owns and operates 10 Culver’s, most of which are in the Chicago area.
Like all restaurateurs, Hollis deals with more expensive materials, from meats to paper products to baked goods such as rolls. Labor is also more expensive now. And Hollis hasn’t raised prices to keep pace with inflation, which means its margins are smaller than before.
He has raised the prices of his Culver’s between 5 and 6% since the start of the year. This means that a burger that used to cost $6 or $7 now costs customers about 35 or 40 cents more.
In a report, Culver’s vice president of supply chain Dan Gorsky said the company’s nationwide sales have “slowed down” but “continue to be very strong for the industry (from foodservice quick service) – especially as many brands are struggling to maintain traffic”.
Portillo’s also adopted the strategy of raising prices below inflation. In the second quarter, the company reported “unprecedented commodity inflation,” particularly for meat products such as chicken, pork and beef.
The Oak Brook-based beef and hot dog chain has raised menu prices for some items by about 5% since January after raising them 3% last fall; the company also increased wages at the start of the third quarter. Leaders said falling behind inflation in price increases was the right move.
“We think we’re getting dwindling customers and our value proposition is really resonating with consumers right now,” CEO Michael Osanloo said on an earnings call last week.
“It’s a smart strategy if you have the leeway to maintain your pricing power at this point,” Brandau said. “Portillo’s has such high restaurant volumes that they may have a little more wiggle room than others. It’s a little more difficult, I think, if you’re an independent restaurant.
At the family-run Superdawg Drive-In, owners Lisa and Don Drucker haven’t raised prices this year. A Superdawg with fries costs $7.25 at the drive-thru’s Wheeling and Norwood Park East locations, the same amount the meal has cost customers since last fall. The Druckers have yet to see any customers withdraw from their visits.
But they know that in an industry operating on such thin margins, they will eventually have to raise prices. Their costs are rising in everything from the shortening used to fry potatoes, which has more than doubled in price, Don Drucker said, to paper goods, hot dog buns and especially labor. ‘work.
“Our employees need to earn more because their costs are higher,” Lisa Drucker said.
“We struggle when we have to raise prices,” she said. “It’s a heartbreaking and heartbreaking experience. We don’t want to.